Andrea Reisman had a problem--a huge, "Is this the end of
my business?" crisis. Just a few weeks earlier, the
30-year-old co-founder and CEO of San Francisco-based Petopia.com,
an online pet supply store, had been on top of the world: She had
closed a May 1999 venture financing round that pumped $9 million
into her start-up. But then came June 14, and her world tilted
upside down when arch-competitor Pets.com announced it had closed a
$50 million venture round that included cash from Amazon.com.
Pets.com was simultaneously forming a strategic alliance with the
e-commerce godfather. That meant visitors to Amazon.com would be
peppered with continual reminders to buy kitty litter and 100-pound
bags of puppy chow at Pets.com.

More aggravation came when Petsmart--a billion-dollar
brick-and-mortar pet chain--announced it would merge its online
outlet with independent online store pet.net, thereby transforming
Petsmart.com into a formidable and slick e-commerce player.

Was it lights out for Reisman and her Petopia? It more than
likely could have been, because in today's bullet-paced
e-commerce battlefield, there's no nostalgia for
yesterday's leaders. But Reisman pulled a fabulous rabbit out
of cyberspace and, in July, closed a $66 million funding round
including buckets of cash from pet store powerhouse Petco, which
agreed to give Petopia exclusivity--Petopia would be Petco's
only online retailing outpost.

"It's been a wild year," Reisman gushes. "The
Petco deal enabled us to leapfrog over many competitors. It's
really given us a head start."

Bigger and Better

Reisman's not alone. Now the big news in the dot.com arena
is that branding is crucial--it takes a name and a sizable amount
of consumer mindshare to win eyeballs, and getting there is an
expensive proposition. The days when a little start-up could pretty
much go it alone the way Yahoo! and Amazon.com did are waning, and
a new philosophy is taking hold: "If you're a small
dot.com, you have to build alliances with bigger companies. You
have no choice," says Philip Anderson, an associate professor
at the Tuck School of Business at Dartmouth College in Hanover, New
Hampshire. "You need to build share fast, and that means you
have to leverage more resources than you can get your mitts on by
yourself."

Jim Datovech, 45, president of ComVersant, an e-commerce
consulting firm in Gaithersburg, Maryland, adds, "Speed to
market is critical today, and that's why alliances make so much
sense. An alliance brings more strengths together."

Back at Petopia, Reisman heartily concurs because, besides
providing money, the partnership with Petco transformed Petopia
into an online bruiser overnight. "This partnership gives us
so many advantages," says Reisman, who ticks off a few:

"We get better pricing on products because we're
pooling our procurement with theirs.

"Every Petco store will feature marketing materials for
the Web site, and we'll have access to its database of five
million customers.

"We're using [Petco's] distribution centers, so we
can get products to customers more efficiently.

"We're doing our media-buying in conjunction with
Petco, so we'll get better deals on advertising."

The ironic punchline to Reisman's good fortune in snaring
Petco as a partner is that she didn't even seek out Petco; it
came to her. "They'd retained [investment banker] Morgan
Stanley to help them select an online partner, and Morgan came to
us."

She didn't spurn the overture. And, very quickly, the
conversations got down to the nitty-gritty of how much money Petco
would put into the business and what it expected in return. The
deal took three months to finalize, but when all the papers were
signed, Reisman says she got just what she wanted: "We remain
an independent company," she says. "Petco's share is
less than 20 percent of the equity, so we can sell different
products at different prices. They are a partner, not the owner. We
retain complete freedom to run this business. Petco is good at
bricks and mortar; we're good at the dot.com space, and its
management knows that."

Everyone's Doing It

Reisman is just one of countless entrepreneurs rushing to
embrace large partners in the dot.com world. Another case in point:
Last August, Toysmart.com, based in Waltham, Massachusetts, closed
a deal where Walt Disney Co.'s Buena Vista Internet Group took
a controlling interest in the dot.com start-up. Exactly what Disney
paid for its slice of the virtual toy store is undisclosed, but,
says Toysmart.com's 34-year-old president and CEO David Lord,
as important as Disney's money is, it wasn't the deciding
factor. "We had a great venture capital syndicate put together
that was ready to fund us," says Lord. "Money wasn't
a problem for us. We decided this based on other factors."

Like what? "The Disney brand is powerful, and, with Disney,
we're getting premium [advertising] space on its Web sites that
we couldn't get if we weren't part of the family. We fit
into Disney's strategic vision, and that will help us really
grow this business."

Lord also offers insight into the deal Toysmart negotiated, and
it includes two crucial elements:

"We insisted that the deal had to be approved at the
highest levels of Disney," says Lord. Why? Lower-level execs
come and go; their clout rises and falls. If a little business is
dependent on an executive who falls out of favor, it too can see
its luster diminish in the eyes of the larger partner.

"Our contract says we only sell good toys. We do not sell
all Disney toys, and there is no pressure on us to do so,"
says Lord. "We are passionate about what we're delivering
to our customers, and that attracted Disney. It understands and
supports our passion."

Does Lord have regrets about selling a huge chunk of his
business? "You always have hesitations about going into a deal
like this," he says. "Earlier, we had talked with Toys
"R" Us and went down the path [toward a part-nering]
fairly far with them. But we decided we couldn't live with the
deal, so we walked away. With Disney, there weren't any
deal-breakers. There were only signs telling us to go forward
because it will really help us grow."

Another take on the benefits of partnering with a big company is
offered by Michael Franz, 46, chairman and CEO of HotOffice
Technologies, a Boca Raton, Florida, developer of virtual intranets
for small businesses. Last August, Franz closed a venture round
that included $6 million from Staples, plus an agreement by Staples
to market HotOffice to its customers. "By ourselves, we're
one thing. With a partner like Staples, we're a very different
thing. Customers trust us much more because of our partnerships. It
makes us seem more reliable."

It Works Both Ways

As good as some of the news may be about the partnerships
proliferating throughout the dot.com world, like most things,
there's a dark side, too. "Partnerships can be an
incredible opportunity, but for the relationship to work,
you've got to work at it," says ComVersant's Datovech,
who cautions that often big companies put up their money but are
unprepared to offer the smaller company anything more.
"They're looking to learn from you but often aren't
prepared to put much else into the relationship," he says.

And that's just the beginning of the negatives. "If
you're not careful, the big company will `gut' you,"
says Ed Roche, a vice president with The Concours Group, a
research-based management consulting firm in Kingwood, Texas.
"They learn how to make your products then dump you. There is
often very little a small company can do to fight back." Your
best defense? Always remember to step very lightly when choosing a
partner.

Dartmouth's Anderson points out another trouble spot:
"Almost by definition, you're taking the larger brand
where it hasn't been before. That's a recipe for
conflict."

Chew on that because it's at the paradoxical core of most
small-big alliances. The big company wants the little partner for
its creativity, its innovation and its ability to plunge into
terrain previously unexplored by the big fellow. But once the deal
is signed and sealed, the risk aversion that is at the core of
virtually all mega-corporations kicks in--and, suddenly, the
partner is counseling caution and slow forward motion.

Some problems are even created by the small business itself.
"It's easy for small-business management to take its eyes
off the ball," says Larry J. Lenhart, a principal of Northern
California High Technology Practice at Deloitte & Touche in San
Jose, California. Bluntly put: Once an infusion of cash from a
large partner eases the pressure to perform, some small business
owners just get lazy or--just as bad--suddenly adopt the methodical
"big company" thinking of their partner and lose the
hard-charging drive to succeed that every entrepreneur needs to
prosper.

A chilling potential by-product: "Often the little
company's best employees will quit," says Roche. Why? They
were initially attracted to the fast pace of a small business, but
as more bureaucracy takes root in the aftermath of a partnership,
they might just bolt.

One last thought to keep you gnawing: "The big company may
acquire effective control of the little company but not
formally," says Roche, meaning a straightforward acquisition
hasn't been done. Instead, by taking command of key
functions--accounting, say, or by assuming multiple board
seats--the big company simply grabs control. "Small companies
usually don't have the expertise to negotiate a fair deal. You
absolutely need a third-party to assist you."

That recommendation is seconded by Ken Burke, 33, founder and
CEO of Petaluma, California-based Multimedia Live, an e-commerce
tool developer that brought in publisher R. R. Donnelley & Sons
Co. as a sizable partner last September. It took eight months to
negotiate that deal, which left Burke still in full control of the
company's ownership. But the key for him, says Burke,
"[was] hiring really good lawyers. They found many things in
the deal we had to get revised or deleted. You don't want to
negotiate that sort of thing alone."

The Happy Couple

In her bustling San Francisco offices, Reis-man must surely
understand the downside of being in a partnership with a mammoth
company, but for right now, hers remains the happy glow of a
honeymooner. "This partnership has gone amazingly well for
us," she says. "A key is that Petco knows we're
building our own brand and own identity. They support us in this,
and there's no way we could have come this far so fast without
that level of support."

Doesn't she have any worries? Well, she admits, there are
two concerns that have continued to win her attention. "A
challenge for us is winning the support of management at the store
level," she says. Top level management may have signed on to
this deal with full enthusiasm, but that doesn't necessarily
mean that store managers--who see both their income and advancement
within the company as being directly linked to how much sales
volume their shops generate--will instantly jump on board.

If they don't? The promised in-store promotion just may not
amount to much if banners are left in stock rooms at the back of
stores and Petco customers aren't given the word about the Web
site. "We recognize this as a potential problem, and we're
trying to work on it," says Reisman. "Besides, most
managers are Petco shareholders as well, and the value of their
shares will go up with our success--and all the local managers know
they're going to lose some business to the Internet, so they
might as well lose it to their own company."

Speaking of share prices, that brings up Reisman's second
problem: the timing of an IPO. She remains tight-lipped as to when
it might occur, but certainly a buy-out by Petco is not her
ultimate goal. Seem surprising? Not in today's dot.com world,
where, increasingly, comparatively new Internet businesses accrue
massive market valuations in just a few blinks of an eye. Pretty
much all dot.coms see themselves plunging into the public markets,
and, with that target in mind, Reisman can only smile: "In
fact, we're looking for more partners with strengths in areas
where our present partners aren't strong," she says.
"In today's market, there's incredible pressure to
produce short-term results, and partners are the key. There's
no doubt about it: The fastest way to grow in the Internet economy
is through partnerships."

Irreconcilable Differences

Don't pop the cork to celebrate a business alliance too
soon: Fifty-five percent of alliances fall apart within
31Â¦2 years, says Los Angeles business consultant
Larraine Segil, author of Intelligent Business Alliances
(Times Books). Just why do these marriages unravel? Segil surveyed
executives with alliance experience to get the answer:

75 percent cited incompatible corporate cultures

63 percent pointed to incompatible management
personalities

58 percent said differences in priorities contributed to
their falling outs

That's why Segil tells small companies in alliances with big
partners to ask themselves this: If the marriage ends in divorce,
do we have the resources to recover? If you don't, get moving
on developing a separation stra-tegy. It may never be deployed, but
with more than half of all corporate marriages ending in quickie
divorces, prudence dictates having a scenario on hand for survival
without the larger partner. "Partnerships can prove
life-threatening to small businesses that aren't prepared for
the day when the wheels come off the alliance," says Jim
Datovech, president of ComVersant.

More hard-eyed advice comes from Steve Patti, president of The
Media Farm Inc., a content services agency in Dallas that has
prospered from close alliances with Compaq, Hewlett-Packard and
other mammoth tech businesses--but that's also seen its share
of deals go south. His advice:

"Properly manage the big company's expectations.
Don't let it tell you, `It's our way or the highway.'
Don't appear too eager to do the deal.

"Protect your ideas--don't give away everything. Keep
a few secrets. The more keenly the big company is aware that it
needs your skills and know-how, the harder it will work to make the
relationship a two-way street that's genuinely a
win-win."

Pre-Alliance Counseling

Want to dig deeper into the benefits--and perils--of forming an
alliance with a bigger business? If you're contemplating an
alliance, you'd better do this due diligence because, quite
plainly, there are more ways for deals to go sour than there are
probabilities they'll prosper. These Web sites offer
well-formed, incisive analysis:

"Dispelling the Myths of Alliances" (http://www.ac.com/overview/Outlook/special99/over_specialed.html)
is a thoughtful article written by a couple of Andersen Consulting
partners, who say that 30 percent of alliances are outright
failures (compared to 39 percent that are deemed unequivocal
successes). They offer tips for getting your alliances in with the
39 percent.

SmartAlliances.com (http://www.smartalliances.com),
put up by consulting giant Booz-Allen & Hamilton, offers the
firm's advice to clients considering alliances. Don't miss
the "Chart of the Week", which offers at-a-glance visuals
on how to do an alliance right (and how most have been done
wrong).

"Mergers and Corporate Consolidation in the New
Economy" (http://www.ftc.gov/os/1998/9806/merger98.tes.htm),
a statement from the Federal Trade Commission (FTC) supported by
rich statistical analysis, gives you the goods on alliances and the
economy. The FTC, by the way, points to several factors as fueling
the current trends: the need to be globally competitive,
technological advances (deals often allow a company to acquire the
technology it craves) and the ongoing wave of downsizing.

Made For Each Other?

Ready to dive into business with a heavyweight? Before you jump,
make sure you know the answers to the following questions, from
Partnering Intelligence: Creating Value for Your Business by
Building Strong Alliances (Davies-Black Publishing) by Stephen
M. Dent. The answers should be in line with your business goals and
visions.

1. What is your potential partner's vision?

2. Where does it want to go as a business?

3. What are its values and ethics?

4. What kind of corporate culture does it have?

5. What types of relationships and partnerships does it already
have and how well have they been working out?

6. What are its strategies to achieve its vision?

7. Has it conducted an internal assessment?

Contact Source

Robert McGarvey is Entrepreneur's "Staff
Smarts" and "Web Smarts" columnist.